Systemic Risk and Asymmetric Responses in the Financial Industry

Germán López-Espinosa, Antonio Rubia, Laura Valderrama and Antonio Moreno ()

No 2012/152, IMF Working Papers from International Monetary Fund

Abstract: To date, an operational measure of systemic risk capturing non-linear tail comovement between system-wide and individual bank returns has not yet been developed. This paper proposes an extension of the so-called CoVaR measure that captures the asymmetric response of the banking system to positive and negative shocks to the market-valued balance sheets of individual banks. For the median of our sample of U.S. banks, the relative impact on the system of a fall in individual market value is sevenfold that of an increase. Moreover, the downward bias in systemic risk from ignoring this asymmetric pattern increases with bank size. The conditional tail comovement between the banking system and a top decile bank which is losing market value is 5.4 larger than the unconditional tail comovement versus only 2.2 for banks in the bottom decile. The asymmetric model also produces much better estimates and fitting, and thus improves the capacity to monitor systemic risk. Our results suggest that ignoring asymmetries in tail interdependence may lead to a severe underestimation of systemic risk in a downward market.

Keywords: WP; descriptive statistics; Value at Risk; systemic risk; tail-risk dependence; downside risk; CoVaR model; CoVaR estimate; risk contribution; CoVaR process; default premium; CoVaR function; CoVaR prediction; CoVaR measure; CoVaR framework; banking system; CoVaR approach; time series; Commercial banks; Vector autoregression; Treasury bills and bonds; Financial statements; Global (search for similar items in EconPapers)
Pages: 38
Date: 2012-06-01
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Citations: View citations in EconPapers (9)

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Journal Article: Systemic risk and asymmetric responses in the financial industry (2015)
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